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Financial Markets and Security Analysis


Ankit Shah
PGDM 09-11 (Finance)
Roll No. 139
Bombay Stock Exchange Limited launched "BSE BANKEX Index" on 23 June 2003. This
index consists of major Public and Private Sector Banks listed on BSE. The BSE B
ANKEX Index is displayed on-line on the BOLT trading terminals nationwide.
a. An Index to track the performance of listed equity of Banks.
b. A suitable benchmark for the Central Government to monitor its wealth on the
A few important features of the BANKEX are given below:
• BANKEX tracks the performance of the leading banking sector stocks listed on the
• BANKEX is based on the free-float methodology of index construction
• The base date for BANKEX is 1st January 2002.
• The base value for BANKEX is 1000 points
• BSE has calculated the historical index values of BANKEX since 1st January 2002.
• 14 stocks which represent 90 percent of the total market capitalization of all b
anking sector stocks listed on BSE are included in the Index
• The Index is disseminated on a real-time basis through BSE Online Trading (BOLT)
• Stocks forming part of the BANKEX along with the particulars of their free-float
adjusted market capitalization are listed below.
Script Selection Criteria for BSE BANKEX :
Eligible Universe
Scripts classified under the banking sector that are present constituents of BSE
-500 index form the eligible universe.
Trading Frequency
Scripts should have a minimum trading frequency of 90% in preceding three months
Market capitalization
Scripts with minimum market capitalization coverage of 90% in banking sector bas
ed on free-float final rank form the index.
Buffer of 2% both for inclusion and exclusion in the index is considered so that
movements in and out of the index are minimized. For example, a company can be
included in the index only if it falls within 88% coverage and an existing index
constituent cannot be excluded unless it falls above 92% coverage. However, the
above buffer criterion is applied only after the minimum 90% market coverage is
SENSEX Constituents (Composition revised from 13 Oct 2010)
Last updated on Wednesday, October 13, 2010
Scrip Code Company Close Price Full Mkt. Cap.
(Rs. crore) Free-Float Adj. Factor Free-Float Mkt. Cap
(Rs. crore) Weight in Index
1,160.10 133,132.65 1.00 133,132.65 27.97
3,304.90 209,860.53 0.45 94,437.24 19.84
2,441.40 112,940.35 0.80 90,352.28 18.98
532215 AXIS BANK
1,588.70 64,952.60 0.65 42,219.19 8.87
1,349.10 42,537.46 0.45 19,141.86 4.02
520.20 38,125.77 0.50 19,062.88 4.00
968.35 35,273.75 0.50 17,636.87 3.71
556.00 29,199.75 0.40 11,679.90 2.45
268.80 12,397.56 0.75 9,298.17 1.95
532648 YES BANK
352.85 12,182.00 0.75 9,136.50 1.92
396.95 20,050.66 0.45 9,022.79 1.90
638.55 26,180.55 0.30 7,854.17 1.65
435.35 7,442.09 1.00 7,442.09 1.56
500116 IDBI BANK L
162.25 15,972.08 0.35 5,590.23 1.17
TOTAL 760,247.80 476,006.82

Index Calculation & Maintenance

Formula for Calculation of Index
All BSE indices (except BSE-PSU index) are calculated using following formula:
Free-float market capitalization of index constituents/ Base Market capitalizati
on * Base Index Value
Index Closure Algorithm
The closing index value on any trading day is computed taking the weighted avera
ge of all the trades of index constituents in the last 30 minutes of trading ses
sion. If an index constituent has not traded in the last 30 minutes, the last tr
aded price is taken for computation of the index closure. If an index constituen
t has not traded at all in a day, then its last day's closing price is taken for
computation of index closure. The use of index closure algorithm prevents any i
ntentional manipulation of the closing index value.
Maintenance of BSE Indices
One of the important aspects of maintaining continuity with the past is to updat
e the base year average. The base year value adjustment ensures that replacement
of stocks in Index, additional issue of capital and other corporate announcemen
ts like 'rights issue' etc. do not destroy the historical value of the index. Th
e beauty of maintenance lies in the fact that adjustments for corporate actions
in the Index should not per se affect the index values.
The BSE Index Cell does the day-to-day maintenance of the index within the broad
index policy framework set by the BSE Index Committee. The BSE Index Cell ensur
es that all BSE Indices maintain their benchmark properties by striking a delica
te balance between frequent replacements in index and maintaining its historical
continuity. The BSE Index Committee comprises capital market expert, fund manag
ers, market participants, and members of BSE Governing Board.
On - Line Computation of the Index
During trading hours, value of the indices is calculated and disseminated on rea
l time basis. This is done automatically on the basis of prices at which trades
in index constituents are executed.
Adjustment for Bonus, Rights and Newly Issued Capital
Index calculation needs to be adjusted for issue of bonus and rights issue. If n
o adjustments were made, a discontinuity would arise between the current value o
f the index and its previous value despite the non-occurrence of any economic ac
tivity of substance. At the BSE Index Cell, the base value is adjusted, which is
used to alter market capitalization of the component stocks to arrive at the in
dex value.
The BSE Index Cell keeps a close watch on the events that might affect the index
on a regular basis and carries out daily maintenance of all BSE Indices.
• Adjustments for Rights Issues
when a company, included in the compilation of the index, issues right shares, t
he free-float market capitalization of that company is increased by the number o
f additional shares issued based on the theoretical (ex-right) price. An offsett
ing or proportionate adjustment is then made to the Base Market capitalization.
• Adjustments for Bonus Issue
When a company, included in the compilation of the index, issues bonus shares, t
he market capitalization of that company does not undergo any change. Therefore,
there is no change in the Base Market capitalization; only the 'number of share
s' in the formula is updated.
• Other Issues
Base Market capitalization Adjustment is required when new shares are issued by
way of conversion of debentures, mergers, spin-offs etc. or when equity is reduc
ed by way of buy-back of shares, corporate restructuring etc.
• Base Market capitalization Adjustment
The formula for adjusting the Base Market capitalization is as follows:
New Market capitalization
New Base Market capitalization = Old Base Market capitalization x
Old Market capitalization
To illustrate, suppose a company issues additional shares, which increases the m
arket capitalization of the shares of that company by say, Rs.100 crore. The exi
sting Base Market capitalization (Old Base Market capitalization), say, is Rs.24
50 crore and the aggregate market capitalization of all the shares included in t
he index before this issue is made is, say Rs.4781 crore. The "New Base Market c
apitalization" will then be:
2450 x (4781+100)
---------------------- = Rs.2501.24 crores
This figure of Rs. 2501.24 crore will be used as the Base Market capitalization
for calculating the index number from then onwards till the next base change bec
omes necessary.
Free Float Concepts
Understanding Free-float Methodology Concept
Free-float Methodology refers to an index construction methodology that takes in
to consideration only the free-float market capitalization of a company for the
purpose of index calculation and assigning weight to stocks in the Index. Free-f
loat market capitalization takes into consideration only those shares issued by
the company that are readily available for trading in the market. It generally e
xcludes promoters' holding, government holding, strategic holding and other lock
ed-in shares that will not come to the market for trading in the normal course.
In other words, the market capitalization of each company in a Free-float index
is reduced to the extent of its readily available shares in the market.
Subsequently all BSE indices with the exception of BSE PSU index have adopted th
e free-float methodology.
Major Advantages of Free-float Methodology
• A Free-float index reflects the market trends more rationally as it takes into c
onsideration only those shares that are available for trading in the market.
• Free-float Methodology makes the index more broad-based by reducing the concentr
ation of top few companies in Index.
• A Free-float index aids both active and passive investing styles. It aids active
managers by enabling them to benchmark their fund returns vis-เ-vis an investible
index. This enables an apple-to-apple comparison thereby facilitating better ev
aluation of performance of active managers. Being a perfectly replicable portfol
io of stocks, a Free-float adjusted index is best suited for the passive manager
s as it enables them to track the index with the least tracking error.
• Free-float Methodology improves index flexibility in terms of including any stoc
k from the universe of listed stocks. This improves market coverage and sector c
overage of the index. For example, under a full-market capitalization methodolog
y, companies with large market capitalization and low free-float cannot generall
y be included in the Index because they tend to distort the index by having an u
ndue influence on the index movement. However, under the free-float Methodology,
since only the free-float market capitalization of each company is considered f
or index calculation, it becomes possible to include such closely held companies
in the index while at the same time preventing their undue influence on the ind
ex movement.
• Globally, the free-float Methodology of index construction is considered to be a
n industry best practice and all major index providers like MSCI, FTSE, S&P and
STOXX have adopted the same. MSCI, a leading global index provider, shifted all
its indices to the Free-float Methodology in 2002. The MSCI India Standard Index
, which is followed by Foreign Institutional Investors (FIIs) to track Indian eq
uities, is also based on the Free-float Methodology. NASDAQ-100, the underlying
index to the famous Exchange Traded Fund (ETF) - QQQ is based on the Free-float
Definition of Free-float
Shareholdings of investors that would not, in the normal course, come into the o
pen market for trading are treated as 'Controlling/ Strategic Holdings' and henc
e not included in free-float. Specifically, the following categories of holding
are generally excluded from the definition of Free-float:
• Shares held by founders/directors/acquirers which has control element
• Shares held by persons/ bodies with "Controlling Interest"
• Shares held by Government as promoter/acquirer
• Holdings through the FDI Route
• Strategic stakes by private corporate bodies/ individuals
• Equity held by associate/group companies (cross-holdings)
• Equity held by Employee Welfare Trusts
• Locked-in shares and shares which would not be sold in the open market in normal
The remaining shareholders fall under the Free-float category.

Determining Free-float Factors of Companies

BSE has designed a Free-float format, which is filled and submitted by all index
companies on a quarterly basis (Format available on ). BSE det
ermines the Free-float factor for each company based on the detailed information
submitted by the companies in the prescribed format. Free-float factor is a mul
tiple with which the total market capitalization of a company is adjusted to arr
ive at the Free-float market capitalization. Once the Free-float of a company is
determined, it is rounded-off to the higher multiple of 5 and each company is c
ategorized into one of the 20 bands given below. A Free-float factor of say 0.55
means that only 55% of the market capitalization of the company will be conside
red for index calculation
Free-float Bands
% Free-Float Free-Float Factor % Free-Float Free-Float Factor
>0 – 5% 0.05 >50 – 55% 0.55
>5 – 10% 0.10 >55 – 60% 0.60
>10 – 15% 0.15 >60 – 65% 0.65
>15 – 20% 0.20 >65 – 70% 0.70
>20 – 25% 0.25 >70 – 75% 0.75
>25 – 30% 0.30 >75 – 80% 0.80
>30 – 35% 0.35 >80 – 85% 0.85
>35 – 40% 0.40 >85 – 90% 0.90
>40 – 45% 0.45 >90 – 95% 0.95
>45 – 50% 0.50 >95 – 100% 1.00

Index Reach - BSE BANKEX

Historical of Replacements in BSE BANKEX

Date Outgoing Scrips Replaced by

09.02.2004 ING Vysya Bank UTI Bank Ltd.
Kotak Mahindra Bank
UCO Bank
Indian Overseas Bank
Jammu & Kashmir Bank
31.01.2005 ... Vijaya Bank
06.06.2005 Corporation Bank Allahabad Bank Ltd.
Jammu & Kashmir Bank Ltd.
UCO Bank
28.11.2005 ... Centurion Bank Ltd.
Indusind Bank Ltd
Karnataka Bank Limited
03.07.2006 Indusind Bank Ltd Federal Bank Ltd.
08.01.2007 Karnataka Bank ...
Vijaya Bank
09.07.2007 ... Karnataka Bank Ltd.
Yes Bank Ltd.
09.06.2008 Centurion Bank of Punjab Ltd. ...
28.07.2008 Andhra Bank IDBI Bank Ltd.
Indusind Bank Ltd.